NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the Twenty-six Weeks ended June 26, 2016 and June 28, 2015
(Unaudited)
NOTE
1 – HISTORY AND ORGANIZATION
Giggles
N’ Hugs, Inc. (“GIGL Inc.“ or the “Company“) was originally organized on September 17, 2004 under
the laws of the State of Nevada, as Teacher’s Pet, Inc. GIGL Inc. was organized to sell teaching supplies and learning tools.
On August 20, 2010, GIGL Inc. filed an amendment to its articles of incorporation to change its name to Giggles N’ Hugs,
Inc.
On
December 30, 2011, GIGL Inc. completed the acquisition of all the issued and outstanding shares of GNH, Inc. (“GNH“),
a Nevada corporation, pursuant to a Stock Exchange Agreement. For accounting purposes, the acquisition of GNH by GIGL Inc. has
been recorded as a reverse merger.
The
Company adopted a 52/53 week fiscal year ending on the Sunday closest to December 31st for financial reporting purposes. Fiscal
year 2016 and 2015 consists of a year ending December 29, 2016 and December 27, 2015.
NOTE
2 – BASIS OF PRESENTATION
The
interim financial statements included herein, presented in accordance with United States generally accepted accounting principles
and stated in US Dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared
in accordance with US generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.
These
statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in
conjunction with the financial statements of the Company for the year ended December 27, 2015 and notes thereto included in the
Company’s annual report on Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.
The condensed consolidated balance sheet as of December 27, 2015 included herein was derived from the audited consolidated financial
statements as of that date, but does not included all disclosures, including notes, required by GAAP.
Results
of operations for the interim periods may not be indicative of annual results.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going
concern
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying
consolidated financial statements, during the twenty-six weeks ended June 26, 2016, the Company incurred a net loss of $569,704,
used cash in operations of $581,386, and had a stockholders’ deficit of $1,441,734 as of that date. In addition, the Company
was behind in certain lease payments of one of its restaurant locations and was in default on a note payable of $683,316. These
factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business
plan. In addition, the Company’s independent registered public accounting firm in its report on the December 27, 2015 financial
statements has raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The
Company had cash on hand in the amount of $113,305 as of June 26, 2016. Management estimates that the current funds on hand will
be sufficient to continue operations through September 2016. Management is currently seeking additional funds, primarily through
the issuance of debt and equity securities for cash to operate our business. No assurance can be given that any future financing
will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able
to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial
dilution for our stock holders, in case or equity financing.
Principles
of consolidation
At
June 26, 2016, the consolidated financial statements include the accounts of Giggles N Hugs, Inc., GNH, Inc., GNH CC, Inc. for
restaurant operations in Westfield Mall in Century City, California, GNH Topanga, Inc. for restaurant operations in Westfield
Topanga Shopping Center in Woodland Hills, California, and Glendale Giggles N Hugs, Inc. for restaurant operations in Glendale
Galleria in Glendale, California. Intercompany balances and transactions have been eliminated. Giggles N Hugs, Inc., GNH, Inc.,
GNH CC, Inc., GNH Topanga, Inc., and Glendale Giggles N Hugs, Inc. will be collectively referred herein to as the “Company“.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates
and assumptions used by management affected impairment analysis for inventory, and fixed assets, amounts of potential liabilities
and valuation of issuance of equity securities issued for services. Actual results could differ from those estimates.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
value of financial instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37“) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs.
The
three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level
1: Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level
2: Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level
3: Pricing inputs that are generally observable inputs and not corroborated by market data.
The
carrying amount of the Company’s financial assets and liabilities, such as cash and cash equivalents, inventory, prepaid
expenses, and accounts payable and accrued expenses approximate their fair value due to their short term nature. The carrying
values of financing obligations approximate their fair values due to the fact that the interest rates on these obligations are
based on prevailing market interest rates.
Income
taxes
The
Company accounts for income taxes under the provisions of ASC 740 “Accounting for Income Taxes,“ which requires a
company to first determine whether it is more likely than not (which is defined as a likelihood of more than fifty percent) that
a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will
examine the position and have full knowledge of all relevant information. A tax position that meets this more likely than not
threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized
upon effective settlement with a taxing authority.
Deferred
income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for tax purposes at each year end, based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation
allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or
some portion, of the deferred tax assets will not be realized. The Company evaluates its valuation allowance requirements based
on projected future operations. When circumstances change and cause a change in management‘s judgment about the recoverability
of deferred tax assets, the impact of the change on the valuation is reflected in current income. Income tax expense is the sum
of current income tax plus the change in deferred tax assets and liabilities.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property
and equipment
The
Company records all property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and
maintenance costs are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful
life of the assets or the lease term, whichever is shorter. Leasehold improvements include the cost of the Company’s internal
development and construction department. Depreciation periods are as follows:
Leasehold
improvements
|
|
10
years
|
Restaurant
fixtures and equipment
|
|
10
years
|
Computer
software and equipment
|
|
3
to 5 years
|
Management
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to
result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset,
an impairment loss is recognized to write down the asset to its estimated fair value. For the year ended December 27, 2015, the
Company took a loss on impairment of $353,414 relating to its Glendale store location For the period ended June 26, 2016, there
are no further indications of impairment based on management’s assessment of these assets.
Leases
The
Company currently leases its restaurant locations. The Company evaluates the lease to determine its appropriate classification
as an operating or capital lease for financial reporting purposes. The Company had three leases up through June 26, 2016, which
were classified as operating leases. Effective June 26, 2016, the Company terminated its lease for its Century City location (See
Note 12) and now has two remaining leases.
Minimum
base rent for the Company’s operating leases, which generally have escalating rentals over the term of the lease, is recorded
on a straight-line basis over the lease term. The initial rent term includes the build-out, or rent holiday period, for the Company’s
leases, where no rent payments are typically due under the terms of the lease. Deferred rent expense, which is based on a percentage
of revenue, is also recorded to the extent it exceeds minimum base rent per the lease agreement.
The
Company disburses cash for leasehold improvements and furniture, fixtures and equipment to build out and equip its leased premises.
The Company also expends cash for structural additions that it makes to leased premises of which $700,000, $506,271, and $475,000
were reimbursed to Century City, Topanga, and Glendale by its landlords, respectively, as construction contributions pursuant
to agreed-upon terms in the lease agreements. Landlord construction contributions usually take the form of up-front cash. Depending
on the specifics of the leased space and the lease agreement, amounts paid for structural components are recorded during the construction
period as leasehold improvements or the landlord construction contributions are recorded as an incentive from lessor.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-based
compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for
services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based
on the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and
vesting to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board (FASB) whereas
the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee
stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances
where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based
compensation charge is recorded in the period of the measurement date.
The
fair value of the Company‘s stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which
uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model,
and based on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation
expense recorded in future periods.
The
Company also issues restricted shares of its common stock for share-based compensation programs to employees and non-employees.
The Company measures the compensation cost with respect to restricted shares to employees based upon the estimated fair value
at the date of the grant, and is recognized as expense over the period, which an employee is required to provide services in exchange
for the award. For non-employees, the Company measures the compensation cost with respect to restricted shares based upon the
estimated fair value at measurement date which is either a) the date at which a performance commitment is reached, or b) at the
date at which the necessary performance to earn the equity instruments is complete.
Loss
per common share
Net
loss per share is provided in accordance with ASC Subtopic 260-10. We present basic loss per share (“EPS“) and diluted
EPS on the face of statements of operations. Basic EPS is computed by dividing reported losses by the weighted average shares
outstanding. Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has
been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and
the exercise of stock options and warrants. Loss per common share has been computed using the weighted average number of common
shares outstanding during the year. For the period ended June 26, 2016 and June 28, 2015, the assumed conversion of convertible
note payable and the exercise of stock warrants are anti-dilutive due to the Company’s net losses and are excluded in determining
diluted loss per share.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue
recognition
Our
revenues consist of sales from our restaurant operations and sales of memberships entitling members unlimited access to our play
areas for the duration of their membership. As a general principle, revenue is recognized when the following criteria are met:
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and services have been rendered, (iii) the price
to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.
With
respect to memberships, access to our play area extends throughout the term of membership. The vast majority of memberships sold
are for one month terms. Revenue is recognized on a straight line basis over the membership period. The company receives payment
from its customers at the start of the subscription period and the company records deferred revenue for the unearned portion of
the subscription period.
Revenues
from restaurant sales are recognized when payment is tendered at the point of sale. Revenues are presented net of sales taxes.
The sales tax obligation is included in other accrued expenses until the taxes are remitted to the appropriate taxing authorities.
We
recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants.
As of June 26, 2016 and December 27, 2015, the amount of gift cards sales was $931 and $4,448, respectively, and were recorded
as deferred revenue.
For
party rental agreements, we rely upon a signed contract between us and the customer as the persuasive evidence of a sales arrangement.
Party rental deposits are recorded as deferred revenue upon receipt and recognized as revenue when the service has been rendered.
Additionally,
revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and complimentary
meals.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Standards
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition
guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09
will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract.
The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early
adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities
will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In
February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record
a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months.
ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and
disclosures. The Company anticipates that this will add significant liabilities to the balance sheet.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company‘s present or future consolidated financial statements.
NOTE
4 – FIXED ASSETS
Fixed
assets consisted of the following at:
|
|
June 26, 2016
|
|
|
December 27, 2015
|
|
Leasehold improvements
|
|
$
|
1,889,027
|
|
|
$
|
2,847,565
|
|
Fixtures and equipment
|
|
|
60,310
|
|
|
|
85,267
|
|
Computer software and equipment
|
|
|
264,890
|
|
|
|
283,001
|
|
Property and equipment, total
|
|
|
2,214,227
|
|
|
|
3,215,833
|
|
Less: accumulated depreciation
|
|
|
(1,091,962
|
)
|
|
|
(1,485,997
|
)
|
Property and equipment, net
|
|
$
|
1,122,265
|
|
|
$
|
1,729,836
|
|
Effective
June 26, 2016, the Company entered into a termination agreement with Westfield Mall Associates to close the Century City Store
resulting from a major reconstruction of the entire Mall. As such, the leasehold improvements with a cost basis of $958,538 and
accumulated amortization of $533,377 were written off and included in the gain on the lease termination (see Note 12). In conjunction
with the closing of the Century City store, the Company also sold for $10,500, all of its furniture, fixtures and office equipment
with a cost basis, net of accumulated depreciation, of $4,529 resulting in a gain of $5,971
Depreciation
and amortization expenses for the thirteen weeks and twenty-six weeks ended June 26, 2016 were $88,741 and $177,882, respectively,
and for the thirteen weeks and twenty-six weeks ended June 28, 2015 were $93,753 and $184,371, respectively. Repair and maintenance
expenses for the thirteen weeks and twenty-six weeks ended June 26, 2016 were $22,833 and $51,826, respectively, and for thirteen
weeks and twenty-six weeks ended June 28, 2015 were $24,242 and $47,667, respectively.
NOTE
5 – INCENTIVE FROM LESSOR
The
Company received $700,000 for Century City, $506,271 for Topanga and $475,000 for Glendale from the Company’s landlords
as construction contributions pursuant to agreed-upon terms in the lease agreements.
Landlord
construction contributions usually take the form of up-front cash. Depending on the specifics of the leased space and the lease
agreement, amounts paid for structural components are recorded during the construction period as leasehold improvements or the
landlord construction contributions are recorded as an incentive from lessor. The incentive from lessor is amortized over the
life of the lease which is 10 years and netted against occupancy cost.
Effective
June 26, 2016, the Company entered into a lease termination agreement with the Westfield Mall Associates that released the Company
from any further obligations. As such, our remaining unamortized tenant improvement allowance of $225,739, and deferred rent of
$63,529 were written off an included in the gain on lease termination.
The
balance of the incentive from lessor as of June 26, 2016 and December 27, 2015, were $847,174 and $1,198,098, and included deferred
rent of $171,801 and $218,874, respectively. As of June 26, 2016, $76,105 of the incentive from lessor was current and $771,069
was long term. Amortization of the incentive from lessor was $33,479 and $61,653 for the thirteen weeks and twenty-six weeks ended
June 26, 2016 and $27,740 and $54,226 for the thirteen weeks and twenty-six weeks ended June 28, 2015, respectively.
NOTE
6 – NOTE PAYABLE, LESSOR –IN DEFAULT
On
February 12, 2013, the Company entered into a $700,000 Promissory Note Payable Agreement with GGP Limited Partnership (“Lender“)
to be used by the Company for a portion of the construction work to be performed by the Company under the lease by and between
the Company and Glendale II Mall Associates, LLC. The Note Payable accrued interest at a rate of 10% through October 15, 2015,
12% through October 31, 2017, and 15% through October 31, 2023 and matures on October 31, 2023.
On
March 1, 2015, the Company and the lender renegotiated the terms of the Promissory Note and agreed to a new note with a principal
balance due of $683,316. As part of the new agreement, the Lender waived principal and interest payments for two years beginning
March 1, 2015. Thereafter, principal and interest will be paid in equal monthly installments of $12,707, within increasing interest
rates. As of June 26, 2016 and December 27, 2015, the principal balance due under the note was $683,316.
Due
to the two-year interest free period, the Company recalculated the fair value of the note taking into account the payment stream
and the incremental changes in the interest rate and determined the fair value of the new note on the date of modification to
be $619,377, net of a discount of $63,939. The Company determined that the discount should be amortized over the two year period
where no interest was due or payable. As such, the Company amortized $15,985 of the discount during the twenty-six weeks ended
June 26, 2016. The unamortized discount at June 26, 2016 was $19,109, and the net balance due was $664,207.
The
lender under the Note is GGP Limited Partnership (GGP). GGP is an affiliate of Glendale II Mall Associates, the lessor of the
Company’s Glendale Mall restaurant location. In accordance with the note agreement, an event of default would occur if the
Borrower defaults under the lease between the Company and Glendale II Mall Associates. Upon the occurrence of an event of default,
the entire balance of the Note payable and accrued interest would become due and payable, and the balance due becomes subject
to a default interest rate (which is 5% higher than the defined interest rate). As of June 26, 2016, the Company was past due
in its rental obligation and the Note is in default. As of June 26, 2016, the entire principal and accrued interest is due and
payable and is classified as current liability.
NOTE
7 – CONVERTIBLE NOTE PAYABLE
A
summary of convertible debentures payable as of June 26, 2016 and December 27, 2015 is as follows:
|
|
June 26, 2016
|
|
|
December 27, 2015
|
|
Iconic Holdings, LLC
|
|
$
|
161,250
|
|
|
$
|
161,250
|
|
J&N Invest LLC
|
|
|
50,000
|
|
|
|
50,000
|
|
Accrued interest
|
|
|
8,797
|
|
|
|
-
|
|
Total Convertible Notes
|
|
|
220,047
|
|
|
|
211,250
|
|
Less: Discount
|
|
|
(61,104
|
)
|
|
|
(139,471
|
)
|
Net Covertible Notes
|
|
$
|
158,943
|
|
|
$
|
71,779
|
|
Iconic
Holdings, LLC
- On December 21, 2015, Giggle N Hugs, Inc., a Nevada corporation (the “Registrant“), issued an
8% unsecured convertible promissory note in favor of Iconic Holdings, LLC, in the principal sum of $161,250. The note was subject
to an original issue discount of $11,250, plus another $11,250 retained by the lender for fees and costs, resulting in net proceeds
to the company of $138,500. The note carries a guaranteed 10% interest rate, matures on December 21, 2016 and is subject to pre-payment
penalties. The note may be converted, in whole or in part, at any time at the option of the holder into the Registrant’s
common stock at a price per share equal to 65% of the lowest volume weighted average price of the Company’s common stock
during the 10 consecutive trading days prior to the date on which Holder elects to convert all or part of the note. The conversion
floor price was set at $0.08. The note also contains a make-good provision requiring the Registrant to make a payment to the holder
in the event the Registrant’s trading price at the time the conversion notice is submitted is below $0.11. Any shares issued
upon conversion of the note shall have piggyback registration rights and failure to do so could result in damages up to 30% of
the principal sum of the note, but not less than $20,000. The note contains various default provisions including a requirement
for the Company to maintain a prescribed closing bid price for a certain number of days, and a continued listing in a principal
market.
The
Company determined that the ability of the holder to convert the note to common shares at 65% of the market created a beneficial
conversion feature upon issuance. The Company also considered if the conversion feature required liability accounting under current
accounting guidelines but determined that the conversion of the shares were indexed to the Company’s stock, and that the
floor of $0.08 would not allow the conversion to exceed the Company’s authorized share limit. Based on the current market
price on the date of issuance of the note of $0.13 and the discount of 65%, the Company calculated an initial beneficial conversion
feature of $86,827. The total note discount was $109,327 including the $22,500 discussed above. Such amount is being recognized
as a note discount and amortized over the life of the note. The balance of the unamortized note discount was $107,691 at December
27, 2015.The Company amortized $53,914 of the discount during the twenty-six weeks ended June 26, 2016. The unamortized discount
at June 26, 2016 was $53,777.
J&N
Invest LLC
- On August 24, 2015, the Company entered into an unsecured Note Payable Agreement with an investor for which the
Company issued a $50,000 Convertible Note Payable, which accrues interest at a rate of 5% per annum and matures on August 31,
2016. The Lender may also convert all or a portion of the Note Payable at any time into shares of common stock at a price of $0.10
per share. As the market price of the stock on the date of issuance was $0.23, the Company recognized a debt discount at the date
of issuance in the amount of $50,000 related to the fair value of the beneficial conversion feature. The discount will be amortized
over the life of the note. The balance of the unamortized note discount was $32,181 at December 27, 2015 The Company amortized
$24,787 of the discount during the twenty-six weeks ended June 26, 2016. The unamortized discount at June 26, 2016 was $7,327.
NOTE
8 – PROMISSORY NOTE
On
December 18, 2015, the Company issued an unsecured promissory note in the principal sum of $265,000 in favor of St. George Investments,
LLC, pursuant to the terms of a securities purchase agreement of the same date. The note was subject to an original issue discount
of $60,000 and a $5,000 fee to cover certain expenses of lender. The note matures in six months and carries no interest unless
there is an event of default. GNH may prepay the note in full within 90 days of the issuance date for $235,000. The Company has
accounted for the discount as a contra account to the note and will be amortized to interest expense over the life of the note.
As such, the Company amortized $60,306 of the discount during the twenty-six weeks ended June 26, 2016. The unamortized discount
at June 26, 2016 was $0, and the net balance due was $265,000.
The
terms of the note transaction are subject to adjustment on a retroactive basis should the Registrant enter into a financing transaction
with terms that would have been more favorable to the lender at any time any portion of the note remains outstanding. The Company
determined this is a contingent transaction, not subject to estimation at this point, and believes such adjustment should be accounted
for at the date it occurs.
NOTE
9 – BUSINESS LOAN AND SECURITY AGREEMENT
In
August 2015, the Company entered into a Business Loan and Security Agreement with American Express Bank, which allows the Company
to borrow up to $174,000. The loan matures in August 2016 and will remain in effect for successive one year periods unless terminated
by either party. The loan is secured by credit card collections from the Company’s store operations. The agreement provides
that the Company will receive an advance of up to $186,000 at the beginning of each fiscal month, and requires the Company to
repay the loan from the credit card deposits it receives from its customers. Assuming the balance has been paid off by the end
of the month, the Company will receive another advance up to the face amount of the note at the beginning of the next fiscal month.
The
loan requires a loan fee of 0.5% of the outstanding balance as of each disbursement date. At June 26, 2016, the advance for the
month of June 2016 had been entirely paid off and there was no amount due as of that date.
NOTE
10 – COMMON STOCK
Issuance
of Common Stock
During
the twenty-six weeks ended June 26, 2016, the Company issued 397,500 shares of common stock issued for professional services rendered,
with a fair value of $30,170 based on the trading price of the common shares on date of grant.
During
the twenty-six weeks ended June 26, 2016, the Company issued 525,000 shares of common stock issued in settlement of an accounts
payable with a fair value of $31,500.
During
the twenty-six weeks ended June 26, 2016, the Company issued 150,000 shares of stock previously reflected as common stock payable
NOTE
11 – STOCK OPTIONS AND WARRANTS
Employee
Stock Options
The
following table summarizes the changes in the options outstanding at June 26, 2016, and the related prices for the shares of the
Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.
A
summary of the Company’s stock options as of June 26, 2016 is presented below:
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding,
December 27, 2015
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
June 26, 2016
|
|
|
115,000
|
|
|
$
|
4.50
|
|
Exercisable,
June 26, 2016
|
|
|
115,000
|
|
|
$
|
4.50
|
|
As
of June 26, 2016, the stock options had no intrinsic value due to the low stock price of the Company’s stock.
There
were no options granted during the fiscal year ended June 26, 2016.
There
was no stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement
of operations for the twenty-six weeks ended June 26, 2016.
NOTE
11 – STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants
The
following table summarizes the changes in the warrants outstanding at June 26, 2016, and the related prices.
A
summary of the Company’s warrants as of June 26, 2016 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Outstanding, December 27, 2015
|
|
166,500
|
|
|
$
|
0.13
|
|
Granted
|
|
|
440,000
|
|
|
|
0.08
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 26, 2016
|
|
|
606,500
|
|
|
$
|
0.09
|
|
Exercisalbe, June 26, 2016
|
|
|
606,500
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
Range
of
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Exercisable
|
|
|
Price
|
|
$0.01 ~ $0.09
|
|
|
606,500
|
|
|
$
|
0.10
|
|
|
|
3.05
|
|
|
|
606,500
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606,500
|
|
|
|
|
|
|
|
3.05
|
|
|
|
606,500
|
|
|
|
|
|
On
May 17, 2016, GIGL entered into a Strategic Alliance Agreement with Kiddo, Inc., a Florida corporation (“consultant“)
whereby consultant will provide marketing and branding services as well as introductions to potential strategic partners and investors.
As
consideration for consultant’s services pursuant to the Strategic Alliance Agreement, GIGL agreed to issue to consultant
a warrant to purchase up to 4,400,000 shares of GIGL’s common stock at an exercise price of $0.075 per share, which warrant
vests in increments based upon the achievement of certain milestones. As of June 26, 2016, 440,000 of these warrants with a fair
value of $31,000 were deemed have been achieved and are included in the table of outstanding warrants above. At June 26, 2016,
the achievement of the corresponding milestones for the remaining warrants to acquire 3,960,000 has been determined to be remote
or undeterminable due to the early stages of the agreement, as such, the warrants have not been included as outstanding in the
table above.
NOTE
12 – COMMITMENTS AND CONTINGENCIES
On
January 13, 2010, the Company entered into a 10-year lease agreement with Westfield Century City for a lease for a restaurant
operation. In October 2015, Westfield Group, the landlord of the Century City location, embarked on a massive $700 million renovation
of the mall. In March 2016 they approached the Company about recapturing its Century City space due to this remodeling. Currently,
approximately 90% of the mall is closed or being remodeled with the completion expected sometime during 2017. On May 13, 2016,
Giggles N’ Hugs, Inc. entered into a Termination of Lease Agreement with Century City Mall, LLC (“landlord“),
accelerating the termination date of the Lease dated January 13, 2010 for its store located in Westfield Century City, Los Angeles,
California. Pursuant to the agreement, the lease was terminated in June, 2016 and the landlord agreed to a monetary reimbursement
of $350,000 which was received by June 26, 2016. For accounting purposes, the Company has removed all the leasehold improvements
(net of accumulated amortization) and removed the deferred incentive due the lessor relating to tenant improvements and the remaining
deferred rent existing at the date of termination resulting in a gain of $214,111 at the end of the 2nd quarter.
During
the year ended December 31, 2012, GNH Topanga entered into a Lease Agreement with Westfield Topanga Owner, LP, a Delaware limited
partnership, to lease approximately 5,900 square feet in the Westfield Topanga Shopping Center. The lease includes land and building
shells, provides a construction reimbursement allowance of up to $475,000, requires contingent rent above the minimum base rent
payments based on a percentage of sales ranging from 7% to 10% and require other expenses incidental to the use of the property.
The lease also has a renewal option, which GNH Topanga may exercise in the future. The Company’s current lease provides
early termination rights, permitting the Company and its landlord to mutually terminate the lease prior to expiration if the Company
does not achieve specified sales levels in certain years. The lease commenced on March 23, 2013 and expires on April 30, 2022.
`
On
April 1, 2013, the Company entered into a Lease Agreement with GLENDALE II MALL ASSOCIATES, LLC, a Delaware limited liability
company, to lease approximately 6,000 square feet in the Glendale Galleria in the City of Glendale, County of Los Angeles, and
State of California. The lease includes land and building shells, provides a construction reimbursement allowance of up to $475,000,
requires contingent rent above the minimum base rent payments based on a percentage of sales ranging from 4% to 7% and require
other expenses incidental to the use of the property. The lease commenced on November 21, 2013 and expires on October 31, 2023.
As of June 26, 2016 and December 27, 2015, the Company was in default of certain of the payments due under this lease.
Rent
expense for the Company’s restaurant operating leases was $163,319 and $130,704 for the thirteen weeks ended June 26, 2016
and June 28, 2015, respectively, and $261,406 and $325,352 for the twenty-six weeks ended June 26, 2016 and June 28, 2015, respectively.
Litigation
On
April 20, 2016, the Company entered into a stipulated judgment in favor of TKM in the amount of $40,000. Under the stipulated
judgment, the Company would only be compelled to pay $20,000 in four equal installments of $5,000, provided they meet the ascribed
timely payments as set forth in the stipulated judgment. The Company has recorded the entire $40,000 judgment since the Company
did not meet the agreed payment schedule.
NOTE
13 – SUBSEQUENT EVENTS
In
July 2016, the Company issued 100,000 shares of its common stock with a fair value of $7,600 to a consultant for services performed.
In
July 2016, the Company issued 367,607 shares of its common stock to Iconic Holdings upon conversion of $20,000 of notes payable
based on the conversion terms of the notes.
St.
George Investments, LLC - The Company executed into a Promissory Note Agreement with St. George Investments, LLC, (“Holder”)
dated December 18, 2015, with a principal amount of $265,000 due in full on June 18, 2016. The Note went into default when the
Company failed to make payment on the due date. Consequently, on July 8, 2016, the Company entered into an Exchange Agreement
with St. George Investments, LLC, to replace the original Promissory Note with a new Convertible Promissory Note (“Note”)
carrying the following terms and conditions.
|
1.
|
The
new Note will add 10% ($26,500) to the original principal as an Exchange Fee, making the new principal amount $291,500.
|
|
|
|
|
2.
|
The
Note shall carry an interest rate of 8% per annum.
|
|
|
|
|
3.
|
The
Note carries a Conversion clause that allows the Holder to have a cashless conversion into shares of Common Stock for all
or part of the principal, at a price equal to the average market price for 20 days prior to the conversion. The Company is
in the process of determining the appropriate accounting for the notes conversion feature and such accounting will be reflected
in the Company’s future financial statement.
|
|
|
|
|
4.
|
In
conjunction with the conversion provision, the Company agreed to an Irrevocable Letter of Instructions to Transfer Agent,
along with a Secretary’s Certificate and Board Resolution, which allows a Share Reserve equal to three times the number
of shares of Common Stock divided by outstanding debt by the defined conversion price, but not less than 18,000,000 shares.
|
|
|
|
|
5.
|
In
addition, the Company executed a Share Issuance Resolution Authorizing the Issuance of New Shares of Common Stock. This
document, in effect, allows the Holder to provide, at their discretion, a Conversion Notice directly to the Transfer Agent
to receive unrestricted shares under the terms of this Exchange Agreement.
|
|
|
|
|
6.
|
Further
to this Exchange Agreement, the Company executed an Authorization to Initiate ACH Debit Entries that allowed the Holder to
receive a daily payment of $312,50 ($7,500 per month). The Company can cancel such authorization with five days’
written notice.
|
On
July 22, 2016, the Holder converted $30,000 of debt into 742,023 shares of Common Stock, at a conversion price $0.04043 per share.
On
August 12, 2016 the Company entered into a third amendment on its lease at The Glendale Galleria. The amendment covered several
areas, including adjustment to percentage rent payable, reduced the minimum rent payable and payment and principal of Promissory
Note. The Promissory Note was adjusted to a balance due of $763,261.57 from $683,316, with zero percent interest, payable in equal
monthly instalments of $5,300 through maturity of Note on May 31, 2028. This amendment has cured the default provision as noted
in Note 6.
Landlord
shall have the unconditional right to terminate the Lease by giving Tenant at least 120 days’ advance written notice of
Landlord’s election to terminate the Lease, under lease amendment.